Chinese brokerages offering overseas investing services to mainland clients have come under pressure from a regulatory push that seeks to seal off one of the few remaining loopholes in the country’s strict capital controls.
A new regulation coming into force this week from the China Securities Regulatory Commission reiterates the need to prevent “illegal cross-border securities businesses”, building on a multiyear initiative to clamp down on such services.
The measure broadens a ban in December on registering new clients in mainland China, which originally applied to UP Fintech Holding, also known as Tiger Brokers, and Futu Holdings, a brokerage backed by tech giant Tencent, ahead of the regulation’s official publication.
The brokerages, which often help Chinese tech workers manage employee equity received from outside the country, until recently had allowed mainland clients to open accounts despite not being licensed to provide overseas investment services.
Investors with existing accounts are not expected to be affected by the move, but some have reacted cautiously to the official announcement at a time when regulators have taken a tougher stance on cross-border financial activity from crypto to stock trading.
“Without brokers like Futu, I do not have any other way to speculate on US stocks,” said one civil servant based in Guangzhou, who asked to remain anonymous. He said the company helped him open a Hong Kong bank account several years ago. Without it, he would not have been able to access overseas markets.
Tencent’s human resources division told staff that existing Futu accounts being used to receive share payments would not be affected, a Tencent employee said, but those opening new accounts should instead use Bank of China International, a subsidiary of state-owned Bank of China.
While such brokerages lacked official licences for overseas investment, they evolved in line with a sharp rise in offshore listings by Chinese tech companies. Of the 337 Chinese companies that listed offshore from 2016 to June 2019, 92 per cent issued employee shares before or after their initial public offerings, according to data from PwC China.
The regulation also impacts Hong Kong brokerages such as Bright Smart Securities, which last month said in an exchange filing that it was suspending accounts for mainland clients, before later stating it would reopen them after clarifying that existing accounts could continue to operate.
Increased curbs on overseas investing, which are historically linked to China’s control over its currency as well as fears of capital flight, come against a backdrop of heightened government pressure on the profitable tech sector. Last month’s disappearance of Bao Fan, a financier who advised on high-profile tech deals, has unnerved businesspeople and investors.
Chinese citizens are allowed to convert the renminbi equivalent of $50,000 into foreign currencies each year, but the money cannot be invested and should instead be spent on purposes such as travel or education. Various loopholes, including purchases of insurance policies in Hong Kong and small transfers using friends’ foreign exchange quotas, have been used to circumvent the rules.
Mainland residents with bank accounts in Hong Kong or other foreign countries can still access overseas brokerage services.
One investor based in Shanghai said the pressure on brokerages was probably linked to China’s new Wealth Connect programme with Hong Kong. The government-approved mechanism allows mainland investors to channel their funds into overseas investments through the territory and has attracted the interest of major financial institutions such as HSBC and Standard Chartered. Investors must cash out their positions in renminbi, and the investment options are limited.
Tiger Brokers said in a statement that it strictly abided by relevant laws and regulations, adding that it was actively co-operating with regulators and would take “corrective measures to stop enrolling new onshore customers” in mainland China, though it would continue to “offer legitimate services to existing onshore customers”.
It added that its global business was not affected and that 90 per cent of its new customers came from Singapore, New Zealand, Hong Kong, Australia and the US.
Futu and Tencent declined to comment on the new regulation. The China Securities Regulatory Commission did not respond to requests for comment.
Additional reporting by Ellie Olcott in Hong Kong